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Full text of "Description of S. 1514, a bill relating to private foundation leasing of business assets listed for a hearing by the Subcommittee on Taxation and Debt Management of the Committee on Finance on July 25, 1977"

[COMMITTEE PRINT] 



DESCRIPTION OF S. 1514; 
A BILL RELATING TO PRIVATE FOUNDA- 
TION LEASING OF BUSINESS ASSETS 
LISTED FOR A HEARING 

BY THE 

SUBCOMMITTEE ON TAXATION AND 
DEBT MANAGEMENT 

OF THE 

COMMITTEE ON FINANCE 
ON JULY 25, 1977 



Prepared for the Use of tpie 
COMMITTEE ON FINANCE 

BY THE STAFF OF THE 

JOINT COMMITTEE ON TAXATION 




i 



JULY 22, 1977 



93-280 



U.S. GOVERNMENT PRINTING OFFICE 
WASHINGTON : 1977 



JCS-42-77 



I. INTRODUCTION 



The bill described in this pamphlet (S. 1514) has been scheduled by 
the Subcommittee on Taxation and Debt Management of the Commit- 
tee on Finance for a hearing on July 25, 1977. The bill relates to leas- 
ing business assets by private foundation to a "disqualified person." 

In connection with this hearing, the staff of the Joint Committee 
on Taxation has prepared a description of the bill. The description 
indicates the present law treatment, the issue involved, an explanation 
of what the bill would do, the effective date of the bill, and the bill's 
revenue effect. 

(1) 



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II. DESCRIPTION i 

S. 1514 — Mr. Allen (for himself, Mr. Sparkman, 

and Mr. Thurmond) i( 

1 
Private Foundation Leasing of Business Assets to ; 

Disqualified Persons i 

Present law 

Under present law (sec. 4941 of the Internal Hevenue Code), pri- 
vate foundations are generalh' prohibited from engaging in transact- 
tions with disqualified persons. The prohibited acts (referred. to, as i 
acts of '"self-dealing") include the "sale or exchange, or leasing, of j 
property between a private foundation and a disqualified person'". 
A "disqualified person" is defined to include anyone who is a "substan- ■ 
tial contributor" to the foundation. A "substantial contributor' in- ! 
eludes any person who has contributed more than $5,000 to the founda- 
tion, if the total contributions from that person exceed 2 percent of the 
total contributions received by the foundation. Once a person is a sub- \ 
stantial contributor, he remains so forever. 

These provisions were added by the Tax Refonn Act of 1969. In 
order to permit the orderly termination of arrangements existing in 
1969 between private foundations and their disqualified persons, the 
1969 Act (sec. 101(1) (2) (C) ) permitted then-existing leasing ar- 
rangements to continue for up to 10 j^ears (through 1979), but only 
so long as the foundation was not disadvantaged by the terms of the 
lease. In addition, the Tax Eeform Act of 1976 amended the 1969 Act p 
to allow these permitted transitional leases to be terminated by a sale 
of the leased property by the foundation to disqualified persons. This 
provision (see 101(1) (2) (F) of the 1969 Act) required that any such 
sale must be completed before January 1, 1978. 

Another provision of present law (sec. 4943) limits the percentage 
of ownership which a foundation (and all its disqualified persons) s 
can hold in any single business. In general, the combined business 
ownership of a foundation and disqualified persons in anv business 
may not exceed 20 percent (35 percent ownership by the foundation 
and disqualified persons together is permitted where an unrelated 
group is shown to be in control of the business) . These provisions Avere 
also added by the Tax Reform Act of 1969, and include transitional 
rules to allow foundations an adequate opportunity to dispose of their 
then-existing holdings. Under tliese transitional rules, where a 
foundation itself owned more than 95 percent of the voting stock in a 
business in 1969, an initial transitional period of 20 years" (generally 
through May 26, 1989) was provided for the foundation to reduce its 
combined ownership (together with disqualified persons) to 50 per- 
cent. Where lesser percentages were owned in 1969. transitional periods 

(2) 



of 10 and 15 years were provided. The Act also allowed foundations 
to dispose of their excess holdings by sales to disqualified persons (sec. 
101 (1) (2) (B) of the 1969 Act.) 
In summary, the Congi-ess — 

(1) provided restrictions on foundation involvement in ownership 
of businesses and forbade completely continuing leasing relationships 
with disqualified persons, 

(2) provided transitional periods for disposing of existing busi- 
nesses and terminating continuing relationships with disqualified 
persons, and 

(3) permitted self-dealing sales only if they would facilitate the 
disposition of excess business holdings or the termination of continu- 
ing lease relationships. 

Issues 

The bill i:>repcnts scvci'al related issues : 

First, whether there should be a permanent "gi'andfather clause" 
for certain cases permitting indefinite continuation of a lease of prop- 
erty between a private foundation and disqualified persons. 

Second, whether the present law's 10-year period for terminating 
leases in existence in 1969 should be extended an additional 10 years 
(through 1989). 

Third, whether a private foundation should be permitted to sell such 
leased property to a disqualified person at any time through the end 
of 1989. 

Ex2)lanation of the hill 
The bill would permit, in certain circumstances, the indefinite con- 
tinuation of a lease between a private foundation and a disqualified 
person if the lease was in existence on October 9, 1969. Subsequent re- 
newals of such a lease would not disqualify the lease for purj^oses of 
this bill. This would be permitted only if the following conditions are 
met: (1) the lessor is a corporation whose stock is wholly owned by 
the private foundation; (2) the lease did not violate the limited re- 
strictions on self-dealing in efi'ect prior to the Tax Reform Act of 
1969 ; (3) the tenns of the least are at least as favorable to the private 
foundation's wholly owned subsidiary as a lease entered into in an 
arrn's length transaction would be; (4) the private foundation's sub- 
sidiary corporation is not itself exempt from income tax; and (5) the 
disqualified person (the lessee) became a disqualified person solely be- 
cau^-e of contributions made to the private foundation before October 
9, 1969. 

The bill would extend through December 31, 1989, a transitional 
rule permitting the sale of stock by a private foundation to disquali- 
fied persons even though the private foundation was not obligated to 
dispose of that stock. 

_ The bill would extend through December 31, 1989, the present tran- 
sitional rule permitting the continuation of leases with disqualified 
persons if those leases were in effect on October 9, 1969. 

^ The bill would extend through December 31, 1989, the existing tran- 
sitional rule permitting the sale of leased property that was subject 
to tlie transitional rule described in the preceding paragraph. 



I 



The intended beneficiaries ^ of the bill are : Public Welfare .Fou.n^-^- 
tion, Inc., a private foundation organized by Charles E. Marsh ; th« 
taxable, wholly-owned subsidiaries of Public Welfare Foundation, 
Inc. (The Spartanburg Herald and Journal, Inc., The Gadsden Times, 
Inc., and The Tuscaloosa News, Inc.) ; and three newspaper operators 
(Newspaper Management-Production, Inc., Gadsden Times Publish- 
ing Corporation, and Tuscaloosa Newspapers, Inc.) who lease the 
assets owned by Public Welfare Foundation, Inc's wholly-owned 
subsidiaries. 

The principal owners of the three operating companies are, re- 
spectively, Phil Buchheit, Frank Halderman, Sr., and James B. Boone, 
Jr. The newspapers operate in South Carolina and Alabama. 

Alternatives 
The staff understands that there are several alternative proposals 
which may be presented in connection w4th the consideration of this 
bill. In general, these proposals Avould limit the scope of the relief pro- 
vided by the bill. Under one proposal, the bill would limit the exten- 
sion of the transitional leases only to 1989 and only in the cia'cmn- 
stances described above in the discussion of the provision of S. 1514 
relating to the indefinite continuation of certain leases. Under a second 
proposal, the definition of a '^substantial contributor"' would be 
changed so that contributions made in lieu of rental payments on cer- 
tain leases made prior to 1969 would not be taken into account in de- 
ciding whether any person met tlie 2-percent and the $5,000 tests 
under section 507 for purposes of determining whether that person 
was a "substantial contributor." 

Effectwe date 
The bill would take effect upon enactment. 

Revenue effect 
The bill is not expected to have any effect cm the revenues. 



^ The first provision in the bill, permitting an indefinite continuation of certain 
leases, appears to be drafted so as to apply only to the situation presented by the 
intended beneficiaries listed above. The second provision does not appear to relate 
to that situation. The remaining two provisions apply across-the-board, and so 
w^ould affect all private foundations with "grandfather clause" leases. 

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